Florida (State or other jurisdiction of incorporation or organization)

65-0420146  (I.R.S. employer identification number)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:	Common Stock, par value $0.001 per share
Securities registered pursuant to Section 12(g) of the Act:	None

 

 

 

	Large Accelerated Filer ¨	Accelerated Filer                   ¨
	Non-accelerated filer     ¨	Smaller reporting company  x

 

 

 

 

 

 

 

		Page Number
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		3
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2010 (unaudited) and June 30, 2010	F-1
	Consolidated Statements of Income and Other Comprehensive Income - for the Three Months Ended September 30, 2010 and 2009 (unaudited)	F-2
	Consolidated Statements of Shareholders' Equity	F-3
	Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2010 and 2009 (unaudited)	F-4
	Notes to the Consolidated Financial Statements (unaudited)	F-5 to F-34
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	19
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Reserved	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
SIGNATURES		25

 

 

 

 

 

 

ASSETS
		September 30,				June 30,
		2010				2010
		(Unaudited)
CURRENT ASSETS
Cash		$	6,216,987			$	17,403,008
Restricted cash			27,489,000				22,902,000
Loans receivable			3,071,687				25,13,308
Notes receivable			29,940				1,045,830
Accounts receivable, trade, net			9,260,960				5,304,684
Other receivables			13,621,988				479,121
Other receivables - related parties			-				477,052
Inventories			1,459,288				2,261,816
Advances to suppliers			10,569,930				55,09,780
Total current assets			71,719,780				57,896,599
PLANT AND EQUIPMENT, net			21,973,819				20,930,413
OTHER ASSETS
Prepayments for land use rights			8,690,085				5,074,485
Prepayments for mine acquisitions			11,996,730				8,858,398
Prepayments for construction of new operating plant			16,165,167				16,789,806
Intangible - land use rights, net			1,906,825				1,892,292
Intangible - mineral rights, net			2,297,351				2,629,437
Other assets			114,123				103,110
Total other assets			41,170,281				35,347,528
Total assets		$	134,863,880			$	114,174,540
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade		$	304,604			$	291,750
Notes payable			19,461,000				2,946,000
Short term loans - bank			14,970,000				14,730,000
Short term loans - others			-				515,550
Due to related parties			298,599				51,381
Other payables and accrued liabilities			532,053				1,433,121
Customer deposits			160,041				106,830
Taxes payable			2,164,097				1,229,019
Total current liabilities			37,890,394				21,303,651
OTHER LIABILITIES
Warrant derivative liability			17,841,697				30,436,087
Total other liabilities			17,841,697				30,436,087
Total liabilities			55,732,091				51,739,738
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $0.001 par value, 100,000,000 authorized,
20,871,192  issued and outstanding as of
September 30, 2010 and June 30, 2010, respectively			20,871				20,871
Additional Paid-in capital			67,269				67,269
Statutory reserves			1,906,085				1,837,395
Retained earnings			74,855,724				59,373,726
Accumulated other comprehensive income			2,281,840				1,135,541
Total shareholders' equity			79,131,789				62,434,802
Total liabilities and shareholders' equity		$	134,863,880			$	114,174,540

 

 

Foreign currency translation and other comprehensive income

The reporting currency of the Company is the US dollar. The functional currency of the Company and the BVI is the US dollar compared to the functional currency of its subsidiaries and VIEs in the PRC which is the Chinese Renminbi (RMB).

For the subsidiaries and VIEs whose functional currencies are other than the US dollar, all assets and liabilities accounts were translated at the exchange rate on the balance sheet date; shareholders’ equity is translated at the historical rates and items in the statement of operations are translated at the average rate for the period. Items in the cash flow statement are also translated at average translation rates for the period, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity.  The resulting transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the three months ended September 30, 2010 and 2009, the transaction gains and losses were not significant.

 

The balance sheet amounts, with the exception of equity, at September 30, 2010 and June 30, 2010 were translated at RMB 6.68 to $1 and RMB 6.79 to $1, respectively. The average translation rates applied to income and cash flow statement amounts for the three months ended September 30, 2010 and 2009 were at RMB 6.76 to $1 and RMB 6.82 to $1, respectively.

Fair value of financial instruments

The Company uses the Financial Accounting Standard Board’s (“FASB”) accounting standard regarding fair value of financial instruments and related fair value measurements. Those accounting standards established a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosures requirements for fair value measures.  The carrying amounts reported in the accompanying consolidated balance sheets for receivables, payables and short term loans qualify as financial instruments are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization and, if applicable, the stated rate of interest is equivalent to rates currently available. The three levels of valuation hierarchy are defined as follows:

Level 1

Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

F-8

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SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

 

Level 2	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value.

The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2010:

 

Restricted cash

Restricted cash represent amounts set aside by the Company in accordance with the Company’s debt agreements with certain financial institutions. These cash amounts are designated for the purpose of paying down the principal amounts owed to the financial institutions, and these amounts are held at the same financial institutions with which the Company has debt agreements in the PRC. Due to the short-term nature of the Company’s debt obligations to these banks, the corresponding restricted cash balances have been classified as current in the consolidated balance sheets.

Accounts receivables, trade, net

During the normal course of business, the Company extends unsecured credit to its customers. Management regularly reviews aging of receivables and changes in payment trends by its customers, and records a reserve when management believes collection of amounts due are at risk. Accounts considered uncollectible are written off. The Company regularly reviews the credit worthiness of its customers and, based on the results of the credit review, determines whether extended payment terms can be granted to or, in some cases, partial prepayment is required from certain customers.

Other receivables

Other receivables mainly include advances to employees for general business purpose and other short term non-traded receivable from unrelated parties, primarily as unsecured demand loans, with no state interest rate or due date. Management regularly reviews aging of receivables and changes in payment trends and records a reserve when management believes collection of amounts due are at risk. Accounts considered uncollectible are written off.

Inventories

 

Inventories are stated at the lower of cost or market, using the weighted average cost method.  Inventories consist of raw materials and supplies, work in process, and finished goods.  Raw materials mainly consist of coal (mined and purchased), rail, steel, wood and additives used in the Company.  The cost of finished goods included (1) direct costs of raw materials, (2) direct labor, (3) indirect production costs, such as allocable utilities cost, and (4) indirect labor related to the production activities, such as assembling and packaging. Management compares the cost of inventories with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost. On an ongoing basis, inventories are reviewed for potential write-down for estimated obsolescence or unmarketable inventories equal to the difference between the costs of inventories and the estimated net realizable value based upon forecasts for future demand and market conditions. When inventories are written-down to the lower of cost or market, it is not marked up subsequently based on changes in underlying facts and circumstances. As of September 30, 2010 and June 30, 2010, the management believed that no allowance for inventory valuation was deemed necessary.

 

F-10

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SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Advances to suppliers

The Company advances monies to certain suppliers for raw materials purchase and construction contracts. These advances are interest-free and unsecured.

Plant and equipment, net

 

The obligation’s fair value is determined using discounted cash flow techniques and is accreted over time to its expected settlement value. Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying amount of the related long-lived asset. Amortization of the related asset is calculated on a unit-of-production method by amortizing the total estimated cost over the salable reserves as determined under Securities and Exchange Commission (SEC) Industry Guide 7, multiplied by the production during the period.

 

Asset retirement costs generally include the cost of reclamation (the process of bringing the land back to its natural state after completion of exploration activities) and environmental remediation (the physical activity of taking steps to remediate, or remedy, any environmental damage caused).

In May 2009, Henan Bureau of Finance and Bureau of Land and Resource issued regulation for “Mine Environment Control and Environment Recovery” (“Mine Recovery Regulations”) which require mining companies to file an Evaluation Report Regarding Mining Environmental Impact (“Evaluation Report”) before December 31, 2010. The corresponding authorities will determine whether to approve the Evaluation Report after performing on-site investigation, and the asset retirement obligation will be determined by the authorities based on the approved filing.

The Company did not record such asset retirement obligation as of September 30, 2010 and June 30, 2010 because the Company did not have sufficient information to reasonably estimate the fair value of such obligation. The range of time over which the Company may settle the obligation is unknown and cannot be reasonably estimated. In addition, the settlement method for the obligation cannot be reasonably determined. The amount of the obligation to be determined by the government authorities is affected by several factors, such as the extend of remediation required in and around the mining area, the methods to be used to remediate the mining site, and the government grants which may or may not be credited to the mining companies.

The Company will recognize the liability in the period in which sufficient information is available to reasonably estimate its fair value.

 

F-12

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SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Income taxes

Income taxes provided on the liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit.  In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.  Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled.  Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.  No significant penalties or interest relating to income taxes have been incurred during the three months ended September 30, 2010 and 2009.  GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

Chinese income taxes

Note 14 – Intangible – land use rights, net

Land use rights, net consisted of the following as of September 30, 2010 and June 30, 2010:

	September 30, 2010 (Unaudited)				June 30, 2010
Land use rights	$	2,346,862			$	2,309,237
Accumulated amortization		(440,037	)			(416,945	)
Total land use rights, net	$	1,906,825			$	1,892,292

Amortization expense for the three months ended September 30, 2010 and 2009 amounted to $16,102 and $15,961, respectively.

Amortization expense for the next five years and thereafter is as follows:

 

Year ended June 30,		Amortization Expense
2011		$	48,305
2012			64,407
2013			64,407
2014			64,407
2015			64,407
thereafter			1,600,892
Total		$	1,906,825

Under the Option Plan, there were outstanding options exercisable to 6,332 shares of the Company’s common stock. Options exercisable for 6,059 shares of the Company’s common stock were granted on November 14, 2004, with exercise price of $96.00 per share and expire on November 14, 2014. Options exercisable for 273 shares of the Company’s common stock were granted on May 2, 2003, with an exercise price of $60.00 per share and expired on May 2, 2010.

Those outstanding options were fully vested before the reserve acquisition was completed on February 5, 2010, and through September 30, 2010 no additional options have been granted.

The following consisted of the outstanding and exercisable options at September 30, 2010: